RISK ASSESSMENT

Recovery dependent on external factors

After a technical recession at the end of 2016, growth rebounded in 2017, supported by the recovery of activity in Russia and the slight rise in the price of commodities. In 2018, the pace of activity should be determined and constrained by these same factors, given the dependence on the economic health of Russia neighbour and world metal prices, and the weakness of domestic growth drivers. In effect, even a very slight growth recovery n Russia would favour exports (almost one quarter of Armenian exports are destined for Russia). It would also encourage household consumption through expatriate transfers (more than 15% of GDP, 70% of which are from Russia), which are set to return to 2007 levels after their fall in 2016. Industrial production, which is highly dependent on the metals sector (50% of exports and almost 10% of GDP, half of which is for copper), should continue to benefit from the moderate rise in world prices, even if the low prices compared to their pre-2014 levels would still constrain investment. The start of production of the Amulsar gold mine planned for 2018 could, however, promote industrial activity beyond its current growth rate.

For domestic determining factors, the degraded business environment, poor infrastructure and the competitive deficit will continue to weigh negatively on potential growth. Moreover, unlike other countries in the region, Armenia maintains an unemployment rate close to the level reached during the 2009 crisis (18.5%), despite a period of high emigration in 2011-2013. Low labour market pressures are holding back underlying inflation, which has been negative since 2016. Total inflation, however, should increase, driven by rising food and commodity prices, as well as continued monetary easing (interest rate cut from 8.75% to 6.0% between January 2016 and February 2017).

Continued budget consolidation and slight decrease in the current account deficit

The government should continue to reduce the budget deficit through the consolidation efforts undertaken since 2016 with the support of the IMF. The implementation of the new Tax Code in 2017 has already led to an increase in tax revenue of around 0.7 percentage point of the GDP, for an estimated potential of 2 percentage points of the GDP over the medium term. Submitted to the National Assembly in October 2017, the revision of the fiscal rule adopted in 2008 should make it possible to make the adjustment at a pace more adapted to the position of the economy in the cycle, and at the lowest cost for potential growth – a victim of cuts to infrastructure spending in recent years. Although the consolidation effort should be carried out at a more moderate pace in 2018, the government should nevertheless continue to introduce major structural reforms, both in terms of social protection and public enterprises: the pension reform adopted in 2014 should finally be implemented on a large scale, with the introduction of mandatory contribution for all employees in July 2018, while the reforms initiated in the utility sector (electricity and water) should reduce the losses associated with certain public enterprises.

Despite a slight improvement, the current account balance is likely to remain in deficit in 2018. After widening in 2017 – as a result of a recovery in domestic demand that ended a period of sharply reduced imports –, the deterioration is expected to only be partially reversed in 2018. In fact, the growth in export earnings and transfers would remain moderate.

Institutions change, but the pressures remain

The presidential elections will take place in April 2018. However, 2018 will be marked by the transition to a parliamentary system, in accordance with the constitutional amendments adopted at the end of 2015 via referendum. While President Serzh Sargsyan cannot run for a third presidential term, he could, however, occupy the office of prime minister given that his party (Republican Party of Armenia, PRA) won the parliamentary elections of April 2017 (58 seats won out of 105 in the Assembly). At the same time, pressures for social change are mounting, with unemployment concentrated in cities (four times higher than in rural areas) and among young people (twice as high as for the rest of the population), in addition to widespread corruption and regional inequalities.

At the geopolitical level, the dispute with Azerbaijan over the territory of Nagorno-Karabakh, officially Azeri but populated mostly by Armenians, has given rise to regular shootings since the Four Day War in April 2016. While the Russian military base in Gyumri seems to maintain and preserve the rest of the Armenian territory from overflowing conflict, security in the Nagorno-Karabakh region remains under threat in the medium term.